Retail Lending: The Bigger They Are, the Harder the Fall?

There's "bricks and mortar" and then there's bricks and mortar. As the year progresses mortgage bankers that rely on retail lending (read: branches) to gather product will be tested as loan production slows and suddenly their loan officers are spending more time surfing TMZ on the Internet than answering phone calls and e-mails from customers.

The spring homebuying season has commenced and the anticipation is that originations will be down this year. Depending on which housing economists you subscribe to, loan production will total between $1.2 trillion to $1.6 trillion in 2010 with a few crazy optimists thinking it could reach $1.7 trillion. (And a few pessimists predicting a $1 trillion disaster and blood in the streets.)

In 2009 fundings totaled $1.9 trillion. But as any good mortgage banker knows, it's not necessarily where you've been, but where you're headed that counts.

As always, there are two key ingredients to originations: interest rates and jobs. Rates are still low by historical standards and it appears the government's decision to exit the MBS purchase market (Fannie Mae/Freddie Mac) may not turn out to be a rate-spiking catastrophe after all.

But many lenders I've talked to over the past few months believe that the refi market will be less robust this year with purchases hardly making up for the decline. In other words, any consumer that was eligible to refi - home equity and employment being key qualifications - has already done so. The easy money has already been taken off the table.

Now the hard part begins: sifting for business through the remaining pile of refi applicants and qualifying new borrowers who want to buy a home.

Unless the job market comes roaring back by the summer and unless mortgage bankers begin to relax their standards ASAP, 2010 will be a challenge. And if it is, indeed, a tough market, who will get hurt the most? My vote goes to the nation's retailers with physical branches, the "bricks and mortar" I spoke of at the beginning of this column.

Any veteran mortgage executive understands that it can be expensive maintaining physical locations to gather product. And it's no secret that retail lending has been transformed over the past 10 years thanks to the Internet and online loan applications.

The two times that I refinanced, the loan officer came to my house, took all the essential information using his laptop, and then followed up with phone calls, e-mails and faxes.

None of it was done in a traditional branch.

In fact, I keep hoping that one of these days a research firm will come along and conduct a study on retail lending today - how it is no longer essential to maintain branches to gather product. It's all about having experienced retail loan officers (on-staff personnel, that is) working directly with applicants at their convenience.

It's often been said that retail lending is more expensive than wholesale production or correspondent because the funder has to maintain full-time personnel, and office space to house them - be it in a branch or call center. As loan volumes decline this year, it will be the traditional brick-and-mortar lenders who will be hurt most. These firms will need to cut costs rapidly and that means trimming personnel and closing unprofitable locations.

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